The outlook is grim for Canadian manufacturing, as a strong loonie is expected to keep labour costs high, deepening the hollowing out of the industrial heartland and boosting regional income inequality in the years ahead.
In a briefing note to investors on Tuesday, CIBC World Markets predicted that a robust Canadian dollar would drive more factory jobs south of the border, as the U.S. and Mexico continue to be seen as more “cost-effective” places to manufacture everything from automobiles to rail cars.
“[B]eyond the one-time recovery from cyclically depressed demand, the factory sector’s growth prospects look to be seriously impaired by the structural hit from a strong Canadian dollar,” economists Avery Shenfeld and Warren Lovely maintained. “Notwithstanding recent gains in manufacturing, plants will continue to be lost to international competitors.”
In their analysis, the economists detail how the rebound in the loonie has transformed the economic landscape since it dipped to an all-time monthly low of 62 cents against the U.S. dollar a decade ago, before moving to parity and beyond in recent years.
The effect on Canada’s non-resource-related manufacturing sector has been significant, as the U.S., taking advantage of a more competitive exchange rate, has managed to maintain its factory sector footprint, while Canada’s manufacturing capacity has withered away, the economists said.
“Lower corporate tax rates in Canada have simply not been enough of a drawing card to alter that trend,” Shenfeld and Lovely maintain, forecasting more trouble in the coming years as the U.S. steps up efforts to attract business.
“Canada’s tax advantage is threatened by a [U.S.] pledge to slash corporate income tax rates and signs that some provinces could delay (or partially reverse) business tax cuts,” they write.
The decline in manufacturing has been profoundly felt in the automotive sector, where they calculate that Canada’s once robust $20-billion trade surplus has transformed into a $12-billion deficit -- a shift that has wreaked havoc on Ontario and Quebec.
In Ontario, for instance, the economists note that real GDP growth has lagged the rest of Canada for nine consecutive years, a gap that has made it much more difficult for the government to beat back its now substantial deficit.
The outlook is much rosier for Canada’s resource-rich provinces, where GDP growth over the next five years is expected to best that of Ontario and Quebec by at least one per cent as commodity prices remain strong.
More freely flowing investment dollars will concentrate future productivity gains, lucrative job opportunities and labour force growth in Alberta, Saskatchewan and B.C., where the economists predict that resource royalties will make “government sector restraint […] considerably less punitive.”
“Canadian dollar appreciation may have largely run its course, but the adjustment process isn’t over,” the economists conclude. “As economic, fiscal and political power consolidates in Western Canada, regional income inequality will soar and inter-provincial tensions will rise.”